Why Businesses Fail in Their First Year

“I could sell that.”

It is the thought that has passed through the mind of every entrepreneur that has seen a need for a product or service. Unfortunately, history is full of failed concepts that were built on hot air and good intentions. Canine sunglasses? Smell-o-Vision? Google Glass? Every year, upwards of 200,000 new businesses are registered in Australia with approximately 1% of those still trading after 12 months.

Out of those who continue to trade, 40%+ suffered from poor strategic management, 40% struggled with cash flow, and 30%+ suffered trading losses throughout the financial year. The risk of failure is all too apparent, but with every new business – such as Uber or AirBnB – the goal of starting a successful business is achievable.

The defining factor in the success of any new business is one thing: information. Despite Australia’s over-supply of willing entrepreneurs, there is a substantial deficit in professional knowledge of starting or running a business. If knowledge equals power, then the most powerful investment for any up-and-coming entrepreneur is quality information. Taking, for example, the model used by Jeremy Streten in “The Business Legal Lifecycle”.

If knowledge equals power, then the most powerful investment for any up-and-coming entrepreneur is quality information. Taking, for example, the model used by Jeremy Streten in “The Business Legal Lifecycle” where the start, growth, and end of a business is mapped out over 13 phases:

Conception;

Start-up;

Initial Clients;

Bringing on Employees;

Protecting IP;

Maximising the Business/ Bringing in Investors;

Expansion/ Franchising/ Licensing or Buying an Existing Business;

Estate Planning;

Investing in Property;

Litigation and Dispute Resolution;

Sale of Part or Whole of the Business or Listing on a Stock Exchange;

Retirement; and

Insolvency/ Winding-Up

It is no secret that the vast majority of new businesses fail within the first year of trading. To best understand that “how” and “why” failure is so prevalent, it is best to track the beginning of a new business and the risks that are associated with starting out. The first four phases of the BLL map the early development of a new business.

Phase 1: Conception

Conception is often seen as the most exciting phase starting a business; it is characterised by enthusiasm and good intentions. Every entrepreneur begins their journey seeking to satisfy a need in the market, and this journey begins by identifying the need and supplying for that need. The trap that many entrepreneurs fall into is believing that a good idea is enough and that the business will take care of itself. The early days will be spend answering questions such as:

What is the need in the market?

Is my idea a one-off, or can it be developed?

Who are my clients going to be?

How am I to fund this venture?

Focussing too heavily on one idea, or over-simplifying the vacancy in the market can prove to be fatal for any new business. An under-prepared initial concept is often no more than a waste of time and resources for a new entrepreneur. It is worth the time and effort to properly develop the original idea, and if necessary, seek out professional advice.

Phase 2: Start-Up

Once an idea is properly conceived, the start-up of the business may begin. If Conception is the most exciting phase, then Start-Up will be the most nerve-wracking. This phase includes setting up a business entity, entering a commercial lease arrangement and even taking out a loan to jump start cash-flow. The average person does not know which is the best business model is for them, so this is the phase where it pays to get some advice. Choosing a business model will need answers to questions such as:

What is the entrepreneur’s personal situation?

What are the assets involved, and how can they be protected?

How much time and effort is going to be expended?

What are the short-term and long-term goals for this idea?

The business models that are available include sole trading, setting up a trust, registering a company, or entering a partnership arrangement. Choosing the wrong business model will likely result in poor cash-flow, inability to access the target market, and inevitable trading losses.

Phase 3: Initial Clients

The third phase is where the idea starts to take shape – finding, and catering to, clients. Much like stalking prize game on the African savannah, an entrepreneur must get to know every aspect of their target audience. A new business owner must begin to cater for an “ideal client” – who is this ideal client? Where do they live? What are their interests? What is their socio-economic status? How will they be exposed to the product and/or service?

Once this ideal client has been determined, the task of selling the initial idea becomes easier. A successful entrepreneur will develop a method of attracting the attention of the ideal client, and will have systems in place to ensure a seamless transaction. Failing to identify an ideal client is a common mistake which often leads to generic and unremarkable sales techniques. Many early-career entrepreneurs struggle with the technical side of selling the initial idea, such as formulating a client agreement form or setting up debt recovery processes; it is essential that these practices are developed before the business can grow.

Phase 4: Bringing on Employees

The fourth phase indicates that the business is well and truly growing in size and capacity. This phase can be the most rewarding if the business owners hire the right candidates – but, hiring the wrong candidates can be a massive expenditure for the business in time and money. There is a wealth of anecdotal evidence that shows business owners making mistakes involving the legal obligations on taking on staff, or hiring the wrong candidates, or simply not having enough work for new staff. It is this stage that seeking professional advice becomes essential, whether it be a lawyer, a business consultant, or a third party recruiter.

Before seeking further advice, every business owner will be to be able to answer the following questions:

Do I want employees or contractors?

Do I have a contract drafted?

Am I aware of my legal obligations to them, and their legal obligations to me?

How much work do I have to share around?

Running a business is, and will always be a significant risk. It is with in the early development of a business (i.e. within the first four phases), that the majority of fatal mistakes are made. We see that the most common reasons for a new businesses to fail their first year are:

Rushing the concept. Sometimes a bad idea is just a bad idea – there is no way to rescue a business that is built on an under-developed concept.

Choosing the wrong business model. The type and structure of the business will have important consequences for out come of the business.

Target marketing. Without having a defined sales strategy, a new business is lost in the wilderness, surrounded by competition.

Staffing choices. Good staff are valuable; bad staff is not. A business owner needs to know the difference.

Our staff are experienced and well-versed in all the pitfalls or decisions that a new entrepreneur may be faced with. If you have any questions, do not hesitate to contact us at (07) 3667 8966, or at info@smslaw.com.au.

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